Direct Tax vs. Indirect Tax-What You Need to Know [Notes with PDF]

admin — Tue, 15 Sep 2020 09:39:33 +0000

In this article, we will learn in-depth about the difference between direct tax and indirect tax, and much more.

Difference between Direct Tax and Indirect Tax

Taxation is an important source of revenue for any government in the world. Every government in the world imposes tax as its own requirement. There are two types of tax; one is a direct tax and the other is an indirect tax. Although the two have the same purpose, there are many differences between the two.

First of all, do we know what direct tax is? And what’s the indirect tax?

Direct tax: a tax that has to be paid directly to the government and cannot be transferred to anyone else is called a direct tax. Example: Income Tax.

Indirect tax: a tax imposed on all goods and services, and not on income and profits, is referred to as indirect tax. Example: Sales Tax.

Direct Tax vs. Indirect Tax

The differences between direct tax and indirect tax are given below:

SL No	Direct Tax	Indirect Tax
1	The direct tax imposed on profits.	The indirect tax is imposed on goods and services.
2	Direct taxpayers are individuals, businesses, and companies.	The indirect Taxpayers are the end consumers of goods and services.
3	A direct tax applies by itself to the taxpayer.	The indirect tax is applicable to each stage of the production chain.
4	In the case of direct taxes, the tax burden falls directly on the individual or taxpayer.	In the case of indirect taxes, the product manufacturer or service provider can easily transfer the tax burden to the consumer of the product or service.
5	Direct taxes cannot be shifted, that is, it has to be paid to the person on whom the direct tax is levied.	Indirect taxes can be easily shifted from one taxpayer to another.
6	Direct tax applied to an entity or individual taxpayer.	Indirect tax has wide coverage because all the members of the society are taxed.
7	The direct tax has higher operating costs and a variety of exemptions.	Indirect Tax has lower administrative costs due to safe, easy collections.
8	Tax avoidance is possible for direct tax purposes.	Tax avoidance is not possible for indirect tax purposes.
9	The direct tax has positive allocative effects as it puts less burden on the collection.	Allocative effects of indirect taxes are not as good as those of direct taxes.
10	Direct taxes help to reduce inflation.	Indirect taxes may help to arise inflation.
11	Direct tax discourages investments, decreases savings.	Indirect tax is growth-oriented, promotes savings.
12	Direct tax is fair, it reduces inequality.	Indirect tax is regressive, rising inequality.
13	Few examples of direct taxes are income tax, wealth tax, etc.	Few examples of indirect tax are sales tax, customs duty, excise duty, etc.

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Value Added Tax (VAT) [Notes with PDF]

admin — Mon, 16 Sep 2019 11:02:00 +0000

In this article, we will learn in-depth about Value Added Tax or VAT, including its definition, example, calculation method, importance, classification, and much more.

What is Value Added Tax (VAT)?

Value-added tax or VAT is an important source of income for every government in the world today. It is the key to the economic development of the country.

The tax imposed on the value-added of the product is called Value Added Tax (VAT)

Example Of VAT

For example, if the production value of a soap for a soap-producing company is $10 and if a 15% value-added tax (VAT) is imposed, the amount of value-added tax (VAT) will be 10 * 15% = $ 1.5 and the cost of production with VAT is $10+ $1.5 = $11.5

Formula For Calculation of VAT

Value-added tax or VAT = (Total production or sales value X Value-added tax – Cost of goods X Value added tax rate)

Examples

A soap-producing company buys raw materials for $10,000 for the production of its soap and produces the final product soap by processing it and selling it at $ 20,000.

VAT = 20,000X15% – 10,000X15%

= $3,000-$1,500

= $1,500

Importance and The necessity of Value Added Tax or VAT

We know that value-added tax is a tax amount by which the value of an article has been increased at every stage of production.

The Importance of applying VAT on goods is significant for developing countries. The importance and necessity of value-added tax are discussed below.

It increases government revenue.
It helps to collect internal resources.
Encourages the export of domestic goods and discourages the import of foreign goods.
Contributes significantly to the socio-economic development of the country.
It helps reduce government spending.
Plays an important role in preserving the domestic industry.
It helps to prevent tax evasion.

Important Information about Value Added Tax (VAT)

After World War II, VAT was first imposed in Germany in order to boost the economy.
Value Added Tax (VAT) Rate on Consumer Goods in Bangladesh is 15%
Value Added Tax (VAT) is an important source of revenue for the government of Bangladesh.
The Value Added Tax (VAT) was first imposed in Bangladesh in 1991.
The Value Added Tax (VAT) imposition Act was first introduced in the national Parliament of Bangladesh on June 11, 2019, and passed on July 9, 2019.
The imposition of Value Added Tax (VAT) was started in 1st July 2019

Classification of Tax

According to the Value Added Tax Act 1991, Bangladesh has three types of taxation systems.

Value Added Tax (VAT)
Turnover Tax
Supplementary tax

Value Added Tax (VAT):

Importer, Manufacturer, Service person or company whose annual sales are more than BDT 15 Lakh, have to pay Value Added Tax (VAT) at a 15% rate.

Turnover Tax:

Individuals or companies whose annual sales are less than BDT 2o lakh, have to pay turnover tax at 4% instead of the value-added tax at a 15% rate.

Supplementary Tax:

There are some luxury goods that have been imposed on supplementary taxation even after imposing value-added tax at different rates to discourage the import and use of those which are detrimental to society. The supplementary tax rate is levied up to 3%

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